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What is a Reverse Mortgage?

A home is a valuable asset to own, and if you're a homeowner who is older than 62 and owes less than 50% of your mortgage — you may be able to tap into that equity with a reverse mortgage. Yep, even if you still owe on your home, you can access your equity if you need cash. Curious to know more? Let's discuss what a reverse mortgage is, what the eligibility requirements are, your options for receiving the cash, some reasons you may use one, and some pros and cons.

All About Reverse Mortgages

All About Reverse Mortgages

A reverse mortgage is a type of loan that converts home equity into cash and allows a homeowner to borrow against the value of their home. So instead of making loan payments, you would receive money from the lender. You get to keep the title to the house, continue living in your home, and are not required to make any mortgage payments or loan payments. You do, however, have to pay property tax and insurance.

While you can pay the loan back at any time you please, the balance of the loan becomes due when the borrower:

  • Dies
  • Moves away permanently
  • Vacates the property for more than 12 months for a medical reason or 6 months for a non-medical reason
  • Sells the home
  • Fails to meet loan obligations like paying their property taxes, insurance, homeowners association fees or maintaining the property

Types of Reverse Mortgages

There are 3 types of reverse mortgages. The most common type is the Home Equity Conversion Mortgage (HECM). The HECM represents a majority of reverse mortgages and is for homes with values below $765,600. If your home value is above that, you would get a Jumbo Reverse Mortgage, also known as a Proprietary Reverse Mortgage. And if you are looking into a reverse mortgage in order to buy a different home than the one you currently live in, then you would get the third type, HECM for Purchase.

Types of Reverse Mortgages

Eligibility

Who is eligible for a reverse mortgage? Here are the specific requirements:

  • 62+ years old
  • Own most of your primary residence (the home you live in)
  • The amount you owe on your mortgage should be smaller than your home's value (less than 50%)
  • Must continue to pay property tax & insurance

Options for Receiving Your Loan Money

There are six ways to receive money in a reverse mortgage. In short, your options are to get all the money at once, get money only as you need it or receive steady monthly payments. The reason for receiving this type of loan will most likely help you decide which is best for you.

  1. Lump-sum: If you need the cash right now, you can opt to get the whole loan at once. With this option, your interest rate will be fixed interest rate — the rest have adjustable interest rates.
  2. Equal monthly payments: Also called a tenure plan, you can receive steady payments each month, as long as the home is your primary residence.
  3. Term payments: Similar to the above, you will receive equal monthly payments but for a set period of your choosing.
  4. Line of credit: With this option, you have access to borrow money as you need it and you'll only pay interest on the amount you borrow.
  5. Equal monthly payments plus a line of credit: This combo allows you to receive steady monthly payments as long as you live in the house as your primary residence, and you can borrow more money as needed.
  6. Term payments plus a line of credit: This is the same as above but you'll receive the monthly payments for a set period of your choosing.

Obtaining a Reverse Mortgage

Reasons for a Reverse Mortgage

Maybe as you're reading this, it's obvious to you why you would want to take out a reverse mortgage. But if you're still not sure whether one would be good for you, here are some reasons you might consider a reverse mortgage:

  • To ensure you have enough money to get through retirement
  • To cover the cost of long-term care
  • To pay for unexpected health costs
  • To buy a different house
  • To access cash because your money is tied up in your home equity
  • To avoid having to sell stocks when the market takes a dive

Pros & Cons

A reverse mortgage can be a great option for some, but isn't necessarily a good idea for everyone. Here are the pros and cons.

Pros

  • Provide cash when your net worth is mostly tied up in your home
  • You can continue to live in your home and retain title to it
  • Income or good credit aren't required to qualify
  • The proceeds aren't taxable
  • No loan payments are required while you occupy the home as your primary residence
  • After the loan is repaid, any remaining equity belongs to you or your heirs
  • Should not affect your Social Security or Medicare benefits — we recommend asking a financial professional how a reverse mortgage loan will affect your financial situation.
  • You (or your heirs) are not liable for any amount of the mortgage that exceeds the value of your home when the loan is repaid

Cons

  • Costly — borrowers must pay an origination fee, an up-front insurance premium, ongoing mortgage insurance premiums, loan servicing fees, and interest. Note: the federal government limits how much lenders can charge for these items.
  • Your home equity decreases and debt increases
  • Complex - make sure you understand how this loan will affect you, your spouse and your heirs
  • Is subject to scams for those who may have cognitive impairments or are in a desperate financial situation
  • As you use up home equity, you have fewer assets available to pass on to your heirs
  • There are situations when your spouse could lose the home when you die
  • Fees may be higher than with a traditional mortgage

Pros and cons of a Reverse Mortgage

In Closing

If you are interested in obtaining a reverse mortgage — be aware that they are a specialty product, and only certain lenders offer them. You should apply with several companies to shop interest rates and fees. While reverse mortgages are federally regulated, there are still differences in what each lender may charge (and still fit within regulations).

You should also expect to complete a counseling session, which is required by the Department of Housing and Urban Development. The session will take at least 90 minutes and costs around $125. During your counseling session, you'll discuss the pros and cons of taking out a reverse mortgage given your unique financial and personal circumstances.

For most people there comes a time when you need additional financial leverage and while we want you to know that this option exists and may be just what you need, please review this option closely and talk with trusted advisors before making the decision to take on a reverse mortgage.

Want more advice about all things home — including homebuying or selling advice? Nestiny is a great place for homebuyer education and to help you gauge how ready you are to buy a home. Journey Homeward allows you to enter all your wants and needs while the True Affordability Tool will break down your budget, showing what you can comfortably afford. You will also receive a Ready Report that will give you a vital head start in the home buying journey, saving you valuable time and money.

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Ready To Become A Smarter Homebuyer?

By signing up, you agree to Nestiny terms of use .
Whether you need a step-by-step guide, video resource or one of our many helpful tools, Nestiny has your back 24/7 for all things home buying and selling. You choose the pace, material, and when and where to learn. Unlock your free access to Nestiny today!
Are you a real estate professional? Go here .
By clicking this button, you'll enjoy free unlimited access to Nestiny and agree to our terms of use . And don't worry! Nestiny will not share your information with any parties without your consent.